UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7378 / January 8, 1997
SECURITIES EXCHANGE ACT OF 1934
Release No. 38141 / January 8, 1997
AAER
Release No. 869 / January 8, 1997
ADMINISTRATIVE PROCEEDING
File No. 3-9110
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:
In the Matter of :
: ORDER MAKING FINDINGS
Carolyn Safer Kenner : AND IMPOSING REMEDIAL
: SANCTIONS
:
:
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I.
On September 27, 1996, the Securities and Exchange
Commission ("Commission") issued an Order Instituting Proceedings
Pursuant to Section 8a of the Securities Act of 1933 and Section
21c of the Securities Exchange Act of 1934 ("Order Instituting
Proceedings"), to determine whether the allegations contained in
the Order Instituting Proceedings were true, and what remedial
action, if any, was appropriate in the public interest. See
Administrative Proceedings File No. 3-9110.
II.
Respondent Carolyn Safer Kenner ("Kenner") has submitted an
Offer of Settlement which the Commission has determined to
accept. Solely for the purpose of these proceedings and any
other proceedings brought by or on behalf of the Commission or to
which the Commission is a party, and without admitting or denying
the findings set forth herein, Respondent Kenner consents to the
issuance of this Order, the entry of the findings contained
herein, and the imposition of the remedial sanctions set forth
below.
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III.
The Commission finds the following:-[1]-
A. FACTS
1. Respondent
Carolyn Safer Kenner, a resident of Staten Island, New York,
was the Vice President, Secretary and a director of Ross
Cosmetics Distribution Centers, Inc. ("RCDC"), a corporation that
acquired and resold fragrance and cosmetics products, from its
inception in June 1982 through May 1989. -[2]-
2. Issuer
RCDC, at all times relevant herein, was a Delaware
corporation. RCDC's principal business is the manufacture,
marketing and wholesale distribution of alternatives to designer
fragrances and cosmetics. Since March 1, 1984, RCDC's common
stock has been registered with the Commission pursuant to Section
12(g) of the Exchange Act and quoted on the NASDAQ.
3. Other Persons
a. Ross Freitas
Freitas was the founder, President and Chairman of the Board
of RCDC from its inception in June 1982 until mid-June 1989.
Freitas also served as RCDC's Senior Vice President between June
1989 and April 1990 and as a director from June 1989 until
November 1991. On February 8, 1995, the Commission filed a
complaint in U.S. District Court in South Carolina alleging that
Freitas violated Section 17(a) of the Securities Act and Sections
10(b), 13(d), 13(g) and 16(a) of the Exchange Act and Rules 10b-
5, 13b2-1, 13b2-2, 13d-1, 13d-2 and 16a-1 promulgated thereunder
by engaging in a fraudulent scheme to prevent disclosure of
related party transactions and control of RCDC, making material
misstatements concerning corporate transactions, and creating
---------FOOTNOTES----------
-[1]- The findings herein are made pursuant to
Respondent Kenner's Offer of Settlement and are not binding on
any other person or entity in these or any other proceeding.
-[2]- On March 16, 1993, Ross Cosmetics Distribution
Centers, Inc. changed its name to Tristar Corp. and is now
headquartered in San Antonio, Texas. For all relevant times
herein, the company was known as Ross Cosmetics Distribution
Centers, Inc. and will be referred to as such in this Order.
==========================================START OF PAGE 3======
misleading financial statements that were publicly disseminated
and filed with the Commission. On March 31, 1995, the Court
entered a Final Judgment of Permanent Injunction and an officer
and director bar against Freitas, who consented to the entry of
the Order and Bar without admitting or denying the Commission's
allegations. Previously, on October 14, 1993, Freitas pled nolo
contendere in U.S. District Court in South Carolina to one count
of wire fraud in criminal proceedings brought against him for
conduct relating to allegations in the Commission's complaint.
b. Eugene D. Derry
Derry was elected to the Board of RCDC on September 11,
1987. He succeeded Freitas as President and Chairman of the
Board of RCDC and served in those capacities from June 1989
through July 1992. On February 8, 1995, the Commission filed a
complaint in U.S. District Court in South Carolina alleging that
Derry violated Sections 10(b), 13(d), and 16(a) of the Exchange
Act and Rules 10b-5, 13b2-1, 13b2-2, 13d-1, 13d-2 and 16a-1
promulgated thereunder. On July 12, 1996, Derry pled nolo
contendere in a criminal action in U.S. District Court in South
Carolina to a one count information alleging a violation of
Section 13(d) of the Exchange Act and was sentenced to pay a fine
of $500,000 and given five years of unsupervised probation.
Under the plea agreement, one condition of probation was that he
promptly leave the United States and not travel to or within the
U.S. for a period of five years without the Court's permission.
4. Disclosures Related to the Third-Party Acquisition
of 35 Percent of RCDC's Outstanding Stock
a. During the period February 1986 through
November 1987, RCDC was unable to make timely payments for
purchases of inventory from one of its suppliers. As a result,
during that time period, RCDC engaged in five transactions that
resulted in the issuance of 950,000 shares, or 35 percent of
RCDC's outstanding stock, in exchange for inventory. RCDC issued
the stock to seven Panamanian corporations owned and controlled
by a foreign third party associated with RCDC's supplier (the
"Panamanian corporations").
b. On January 27, 1988, RCDC filed with the
Commission a Form 10-K for its fiscal year ended August 31, 1987
("1987 10-K"). Item 1, Business, falsely described RCDC's first
transaction with the Panamanian corporations as "an arrangement
with a non-affiliated overseas manufacturer." The 1987 10-K
falsely described subsequent transactions with the Panamanian
corporations as "a series of transactions with seven non-
affiliated Panamanian corporations." Further, the 1987 10-K
omitted to disclose that the foreign third party then
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beneficially owned approximately 23 percent of the outstanding
stock of RCDC. Kenner signed the 1987 10-K.
c. Kenner knew or was reckless in not knowing
that RCDC had issued shares to the Panamanian corporations,
rather than to independent corporations, and therefore to the
foreign third party. Kenner also knew or was reckless in not
knowing about the foreign third party's beneficial ownership in
RCDC.
d. On December 30, 1988, RCDC filed a Form 10-K
for its fiscal year ended August 31, 1988 ("1988 10-K") that
repeated the description of the first transaction with the
Panamanian corporations. Further, RCDC failed to disclose that
the foreign third party's beneficial ownership of RCDC then
amounted to 35 percent of the outstanding stock.
e. The 1988 10-K falsely characterized the
transactions with foreign third party-controlled Panamanian
corporations, effected during fiscal years 1987 and 1988, as a
"series of private placements ... in exchange for cash and
merchandise." Further, the 1988 10-K falsely stated that the
transactions in August and October 1987 with the foreign third
party-controlled Panamanian corporations constituted issuance of
stock "to a major vendor," rather than to a related party.
f. Further, Item 10 of the 1988 10-K, relating
to directors and executive officers of RCDC, did not disclose
that Derry, an RCDC director, was a nominee of the foreign third
party. Kenner signed the 1988 10-K.
g. Kenner knew or was reckless in not knowing of
the underlying facts and transactions disclosed in the 1988 10-K.
5. False Credit Memo and Other False Accounts
In 1987, RCDC's Comptroller calculated the company's
profit as approximately $124,000. Also in 1987, Freitas obtained
a false $180,000 credit from an intermediary. By booking the
credit, RCDC reported net income of $304,000 for fiscal year
1987. RCDC reported this $180,000 overstatement in the 1987 10-K
and in the 1988 10-K. Kenner knew or was reckless in not knowing
about the false credit memo when she signed the 1987 and 1988 10-
Ks.
6. False Representations to Auditors
In connection with the preparation of RCDC's audited
financials for the fiscal years ended August 31, 1987, Kenner,
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and two other RCDC officials, signed letters of representation to
the company's auditors falsely claiming that RCDC had properly
recorded or disclosed in its financial all related party
transactions and that the company's accounting practices were in
conformity with generally accepted accounting principles
("GAAP"). In fact, as described above, Kenner knew or was
reckless in not knowing about the related-party transactions and
RCDC's overstated net income.
7. Kenner's Beneficial Ownership of RCDC Stock
a. When RCDC became a public company in 1984,
Kenner beneficially owned 26 percent of RCDC's outstanding stock.
RCDC's initial public offering and additional sale of shares,
both in 1984, diluted Kenner's beneficial ownership interest. As
of February 15, 1985, Kenner was obligated to disclose on
Schedule 13G her beneficial ownership of 18 percent of RCDC's
outstanding stock. Kenner never filed a Schedule 13G or
amendments disclosing material changes in her beneficial
ownership interests.
b. Further, Kenner also failed to file timely a
Form 3 and Forms 4 as required by Section 16(a) and Rule 16a-1.
On January 25, 1988, almost four years after her filing
obligation first arose, Kenner filed a Form 3, disclosing her
beneficial ownership of 369,921 shares of RCDC stock. Between
January 25, 1988 and July 24, 1989, Kenner filed several Forms 4,
many of which were not timely.
c. In connection with the execution of an
agreement to sell her RCDC stock, Kenner did not file Forms 4
when beneficial ownership of shares was transferred on 24
separate but regular intervals. Instead, on December 19, 1991,
two and one half years after the execution of the underlying
agreement, she filed a Form 4 disclosing the transfer of her
shares.
d. In November 1988, RCDC filed with the
Commission and disseminated to its shareholders a proxy statement
for its December 1988 annual meeting ("1988 Proxy"). The 1988
Proxy did not disclose (1) RCDC's relationship with the foreign
third party; (2) the relationship among the Panamanian
corporations, RCDC's supplier and the foreign third party; (3)
Derry's relationship with the foreign third party; and (4) the
foreign third party's beneficial ownership of RCDC's outstanding
stock. Kenner knew or was reckless in not knowing about these
undisclosed facts when she signed the 1988 Proxy.
B. APPLICABLE LAW
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1. Antifraud Violations
Section 17(a) of the Securities Act, and Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder, prohibit
the use of any means or instrumentality of interstate commerce or
the mails to employ devices, schemes or artifices to defraud.
These provisions also prohibit, among other things, making
materially false and misleading statements in connection with the
offer, purchase or sale of any security. A fact is material if a
reasonable investor would consider it important in making
investment decisions or would view the information as having
significantly altered the "total mix" of information made
available. Basic, Inc. v, Levinson, 485 U.S. 224, 2312-32
(1985).
2. Reporting and Recordkeeping Violations
Section 13(a) of the Exchange Act and Rule 13a-1 promulgated
thereunder require issuers of registered securities to file with
the Commission annual, current (Form 8-K), and quarterly reports.
Rule 13b2-2 prohibits officers and directors from, directly or
indirectly, making or causing to be made materially false or
misleading statements, or omitting to state, or causing another
person to omit to state, any material fact in order to make
statements made not misleading to an accountant in connection
with any audit or examination of the financial statements
required to be filed with the Commission, or the preparation or
filing of any document or report to be filed with the Commission.
Rule 12b-20 requires that these periodic reports contain all
information necessary to ensure that statements made in them are
not materially misleading.
3. Beneficial Ownership Disclosure Violations
Section 13(d) of the Exchange Act and Rule 13d-1 promulgated
thereunder require any person who acquires the beneficial
ownership of more than five percent of any equity security of a
class which is registered pursuant to Section 12 of the Exchange
Act to file a Schedule D with the Commission within 10 days.
Section 13(d)(2) of the Exchange Act and Rule 13d-2 promulgated
thereunder require a person to promptly file an amendment to the
statement filed pursuant to section 13(d)(1) "[i]f any material
change occurs in the facts set forth in the statement." Section
13(g) of the Exchange Act requires the direct or indirect
beneficial owner of more than five percent of any class of any
equity security registered pursuant to Section 12 of the Exchange
Act, who otherwise is not obligated to file a Schedule 13D, to
file a Schedule 13G with the Commission within 45 days after the
end of the calendar year in which such direct or indirect
beneficial owner became obligated to report his beneficial
ownership.
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Section 16(a) of the Exchange Act and Rule 16a-1 promulgated
thereunder required that beneficial owners of more than ten
percent of any class of any equity security registered pursuant
to Section 12 of the Exchange Act file a Form 3 by the effective
date of a registration statement filed pursuant to Section 12, or
within ten days of becoming such a beneficial owner. Until May
1, 1991, Rule 16a-1 implemented the statutory filing requirements
under Section 16 of the Exchange Act. On January 10, 1991, the
Commission adopted a comprehensive revisions of the rules under
Section 16, which became effective on May 1, 1991. See Rel. 34-
28869, 56 Fed. Reg. 7242 (Feb. 21, 1991). These amendments,
inter alia, place the implementation of the former Rule 16a-1
filing requirement in new Rules 16a-2 and 16a-3.
4. Proxy Violations
Section 14(a) of the Exchange Act prohibits any person from
soliciting a proxy in contravention of the rules and regulations
prescribed by the Commission. Rule 14a-9 promulgated thereunder
prohibits the making of any false or misleading statement, or the
omission of any material fact, in any proxy solicitation.
C. Violations by Kenner
1. As described above, Kenner violated Sections 10(b)
and 14(a) of the Exchange Act, Rules 10b-5, 14a-9 and 13b2-2
promulgated thereunder, and Section 17(a) of the Securities Act
by:
a. signing two RCDC annual reports and one proxy
statement that contained false disclosures
and omitted to state material facts;
b. failing to file a Schedule 13G and amendments
thereto, and failing to file timely a Form 3
and Forms 4, reflecting her ownership,
purchases and sales of RCDC stock; and
c. signing the letter of representation to
RCDC's auditors, falsely claiming that the
company had properly recorded or disclosed in
its financials all related party transactions
and that the company's accounting practices
were in conformity with GAAP.
2. As described above, Kenner violated Sections
13(d), 13(g) and 16(a) of the Exchange Act and Rules 13d-1, 13d-2
and 16a-1 promulgated thereunder by failing to disclose on
Schedule 13G, by February 15, 1985, her beneficial ownership of
18 percent of RCDC's outstanding stock. As her beneficial
ownership decreased in the six following years to less than five
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percent of the outstanding stock of RCDC, Kenner also failed to
file amendments disclosing material changes in her ownership.
Kenner also failed to file timely Forms 3 and 4.
3. As described above, Kenner caused RCDC to violate
Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1
promulgated thereunder by signing RCDC's 1987 and 1988 10-Ks and
1988 Proxy when she knew or was reckless in not knowing that
these filings with the Commission contained materially false and
misleading information and omitted to state material facts.
V.
According, IT IS HEREBY ORDERED THAT Kenner cease and desist
from committing or causing any violation or future violations of
Sections 10(b), 13(d), 13(g), 14(a) and 16(a) of the Exchange Act
and Rules 10b-5, 13d-1, 13d-2, 14a-9 and 16a-1, and 13b2-2
promulgated thereunder and Section 17(a) of the Securities Act
and causing violations or future violations of Section 13(a) of
the Exchange Act and Rules 12b-20 and 13a-1 promulgated
thereunder.
For the Commission, by its Secretary, pursuant to delegated
authority.
Jonathan G. Katz
Secretary